Limitations of internal controls and dysfunctional behaviour

In this lesson

1. 0:00 Limitations of Internal Control Systems
2. 0:18 Costs and Benefits of Controls
3. 2:14 Setting SMART Targets for Clarity
4. 3:23 Management Style and Control Effectiveness
5. 5:17 Short-Term vs Long-Term Target Tensions
6. 6:24 Employee Role in Control Failures
7. 7:34 Dysfunctional Behaviours Under Pressure

About this lesson

You'll explore the cost-benefit analysis of controls, understand how management attitudes shape compliance, and discover the five key types of dysfunctional behaviour that arise when targets and controls are poorly designed. The video covers the practical constraints that prevent internal controls from being perfect. These include direct and opportunity costs, human error, management override, and exposure to non-routine events or organisational change. You'll see why setting smart targets—specific, measurable, achievable, realistic and time bound—is essential to reducing confusion and unintended consequences. A major focus is management style and its impact on behaviour. You'll learn how Hopwood's budget constrained style (rigid target enforcement) encourages manipulation, while a profit conscious style (flexibility on how targets are met) reduces dysfunctional decisions. The lesson also covers the five types of dysfunctional behaviour identified by Berry et al: tunnel vision, myopia, measure fixation, misrepresentation and ossification. Understanding these helps you recognise why employees might bypass controls or manipulate reporting, and how broad, balanced performance measures can mitigate these risks. This content is directly relevant to audit and assurance, performance management and strategic business leader papers, where you'll need to evaluate control effectiveness and explain why control failures occur.

Duration: 10m